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Australia moves to implement a director ‘safe-harbour’ defence

The Australian government has announced a 'National Innovation and Science Agenda' to be introduced by the middle of 2017, which includes providing a defence to protect directors from liability for insolvent trading where restructuring advice is obtained in an attempt to turn around a company's financial position. The government has also released the Productivity Commission Report on 'Business Set-up, Transfer and Closure' which contains recommendations on how the defence will operate.

The lack of a 'safe harbour' defence has long been a criticism of Australia's insolvency laws. Because directors are exposed to personal liability for insolvent trading they feel pressure to call in administrators or liquidators when a company first experiences financial trouble. Often when strategies are available to improve the performance of the organisation and achieve a successful restructure.

The government's proposed ‘safe harbour’ defence will be incorporated into the Corporations Act 2001 (Cth) and will permit directors of solvent but struggling companies to seek advice and provide for a reasonable period of time to restructure without directors being exposed to liability for insolvent trading.

The Productivity Commission Report provides that the 'safe harbour' defence is intended to be available where:

directors of a company have made, and documented, a conscious decision to appoint a safe harbour adviser with a view to constructing a plan to turnaround the company;

the adviser was presented with proper books and records upon appointment, and can certify that the company was solvent at the time of appointment;

the adviser is registered and has at least 5 years’ experience as an insolvency and turnaround practitioner and directors are able to demonstrate that they took all reasonable steps to pursue restructuring; and

restructuring advice must be proximate to a specific circumstance of financial difficulty, and subject to general anti avoidance provisions to prevent repeated use of the safe harbour defence within a short period.

The defence would not attach to any particular decision and instead would cover the running of the business and any restructure activity from the time of appointment until the reasonable conclusion of implementation of the advice.

If the adviser forms the opinion that the business cannot be successfully restructured, the safe harbour period will terminate and formal insolvency processes will commence.

The Productivity Commission expressed the concern that the 'safe harbour' defence should not be used by directors to carry out phoenix activities that siphon assets out of the business and into a new company. To limit this risk the Commission has recommended the introduction of a director identification number, underpinned by an identification process along the lines required to establish a bank account, to monitor director registration. Where this recommendation will be taken up is unclear.

A proposal paper for the 'safe harbour' defence will be released in the first half of 2016.

Compare jurisdictions: Corporate Governance

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